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EXECUTIVE COMMITTEE

Over-all Chairman Jan Raphael Salud

Vice-Chairpersons for Academics

Jonalyn Porquez Michael Quesada

Vice-Chairperson for Logistics Cristina Elaine Mangrobang

Vice-Chairperson for Finance Amerissa Base

Vice-Chairperson for Secretariat Patricia David

Vice-Chairperson for Recruitment Kathleen May Clareza

SUBJECT HEADS

Political Law Maicha Lucaylucay

Labor Law Roberto Martin Buenaventura

Civil Law Michael Malvar

Taxation Law Amerissa Base

Commercial Law Cherylette Lingao

Criminal Law Mina Batungbacal

Remedial Law Michael Quesada

Legal Ethics Miguel Justin Rigor

Legal Forms and Legal Writing Karla Soleil Rosal

MEMBERS

Altares, Philip Neri, Jorgianna

Basconcillo, Ian Zander Ngo, Dianne

Cosico, Michiko Palacol, Jamie Rose

Daganta, Fely Rose Palileo, Fernando Jr.

Dechavez, Alyssa Mae Palmiery, Fritzielyn

De Paz, Marvin Pastores, Cherie

Escucha, Alexandra Gerardine Red, Karen Christine

Galan, Cherie Amor Talatala, Juan Miguel

Gloria, Nadine Alessandra Vibandor, Jo Marie Angeli

Javier, Gemma Andrea Yang, Gladys Mae

Ibasco, Caselyn Yapjoco, Soleil

Llave, Miguel Ycong, Cherry Joy

Martinez, Ambrosio Advisers: Atty. Bruce V. Rivera

Munoz, Lirio Dean Ulpiano P. Sarmiento III

Publ ished in cooperat ion with

EDITORIAL BOARD

Editor-in-Chief Aretha Eugenio

Associate Editor Ma. Katerina Santiago

Managing Editor Laisa Mae Aguila

EIC Emeritus Mary Sayeh Hassani

News Editor Joey Alfonso

Feaures Editor Rio Dizon

Literary Editor Jenna Marie Dela Cruz

Layout Artists Sam Santos Luvimindo Balinang, Jr.

Carlo June Tibayan

ADVISER: Atty. Rita Linda V. Jimeno

Real Property Tax/ Real Estate Tax

I will start the discussion by comparing the exemption of various organizations. Kasi dito medyo naintindihan natin yung ibang constitutional provisions. Memorized na natin yan, enumeration, definition. But lets do some comparison as to the exemption of various organizations from real estate tax, taxability for income tax purposes, taxability for estate tax purposes, for donors tax purposes and deductibility from the gross income, these are the points that we need to study.

Lets start with the government. Ang sabi natin: the government is exempt from payment of tax, but that is just a mere general rule. There are specific rules

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Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang

Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

on application of exemption of governmental agencies. What are these specific rules?

1) Government agencies to which the state exercises governmental functions are exempt, unless there is a law requiring taxation; and

2) Governmental agencies to which the state exercises proprietary functions are subject to tax, unless there is a law exempting them.

Government Owned and Controlled Corporations (GOCCs)

When we talk of Government Owned and Controlled Corporations (GOCCs), these are treated as ordinary domestic corporations and therefore, they are subject to all kinds of corporate taxes except for the following: SSS, GSIS, PHIC, PCSO.

PAGCOR is no longer exempt. I will teach you how these governmental agencies are subjected to tax.

So the rest of the GOCCs (except SSS, GSIS, PHIC & PCSO) are subject to tax just like an ordinary domestic corporation. Okay, now we also have rules for Government Educational Institutions. In laymans language, we refer to it as public schools, public elementary schools, public high schools and state universities, iba rin yung tax treatment dito. I will teach you how the tax is imposed on these kinds of institutions. So let me start by giving you an example, ha? Para naman maintindihan ninyo.

Governmental agencies performing governmental functions

So let us say that this is a parcel of land. Let us discuss the rules on taxability and exemption of governmental agencies. Lets start with governmental agencies to which the state exercises governmental functions, example DSWD, DPWH, napakarami niyan, these are the governmental agencies. So DSWD, let us say that this is the land occupied by the office, building 1, building 2, building 3, it has its office here, it has a small park and theres a parking lot. Then a portion here is rented out by DSWD to private entities, let us say KFC, McDo and Jollibee, and these private entities are paying rentals to DSWD. Thats the physical set up of the government agency. The first question is of course, is DSWD, a governmental agency exempt or subject to payment of real property tax or real estate tax (RPT)?

e.g. Lay-out of building owned by DSWD

You will not find the answer in the computation. When we talk of RPT, its always the Local Government Code of 1991 which governs exemption or taxability of properties for purposes of RPT.

Ang sabi sa Local Government Code of 1991, the following properties are exempt from payment of real estate tax: Real properties owned by the government of the Republic of the Philippines or any of its instrumentalities or agencies, provided, that the beneficial use thereof does not inure to the benefit of a non-exempt entity. In other words, even if it is owned by the government, if the beneficial use pertains to a non-exempt entity, it will no longer be exempt from payment of real estate tax.

The Local Government Code does not say, actually, directly, exclusively used for governmental purpose. Ang sinabi lang niya, lahat ng pagaari ng gobyerno ay libre sa RPT subalit kung ang gamit niya ay para sa tao o para sa taxpayer na hindi tax exempt, then hindi na siya magiging exempt. So, following that rule when you are asked, is this portion of the property subject to RPT? (Pointing to building 1 up to parking lot) EXEMPT. The portion which pertains to a non-exempt entity (portion rented to KFC, McDo, Jollibee) is no longer exempt from payment of real property tax.

Recent jurisprudence

There are a lot of cases, new cases decided by the SC applying this doctrine. We have two cases, the one involving Iloilo Fishing Port and Navotas Fishing Port. What happened there in those two cases decided by the SC in 2010 and 2009? Lets take the case of Iloilo, ang city government ng Iloilo, ni-reclaim yung shoreline at kinonvert into a fishing port. After conversion, a portion thereof was rented to tenants, the local government of Iloilo assessed real estate tax on the portion occupied by tenants because they were paying rentals. So ang issue dito ay, Paano ang taxability ng lupa ng gobyerno na ang isang portion ay ginagamit ng government at ang kabilang portion ay ginagamit ng non-exempt

Building 1

Building 2

Building 3

Office

Park

Parking Lot

Portion rented to

KFC, McDo, Jollibee

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entity? Applying the rule under the Local Government Code of 1991, ang sabi ng Korte Suprema, The portion of the fishing port rented out to tenants and paying rentals will be suject to real estate tax because those are not exempt anymore from payment of RPT. Following the same doctrine is the Navotas Fishing Port. Ganun din ang sitwasyon, pina-rent naman. Yung portion na pinarent sa public and paying rentals, hindi na raw exempt from payment of real estate tax.

Build-Operate-Transfer Agreement

Okay, now there is another doctrine as far as RPT is concerned. Under a Build-Operate-Transfer Agreement (BOT) the government owns the property. Here comes a third person, a tax payer, a private entity entering into an agreement with the government that the private entity will build, operate, and then later on transfer the improvements to the government. The agreement is: the private entity builds, operates and then eventually transfers the infrastructure to the government after a certain period of time.

What is the question? During the BOT agreement while the property is owned by the government, is the property subject to RPT?

Ang sabi ng SC, it is subject to RPT because the beneficial use in the mean time that there is a BOT pertains to a non-exempt entity, and what the government has at that time is merely a contingent benefit Why? Because its benefit is contingent upon the subsequent transfer to the government and while it is being used by the non-exempt entity under the Local Government Code of 1991, it will not be exempt from payment of real estate tax.

Income realized by government agency from projects

Now, lets continue. DSWD, a governmental agency, realizes income out of projects. Yung mga batang kinukuha nila, matatandang kinukuha nila, their educational courses in the meantime that they are in the hospice. So meron silang mga projects, DSWD realizes income out of these projects, lets say P50,000. Ang tanong satin ay: Is it income from DWDs point of view? Is it INCOME? YES. Because income is anything that flows into the wealth of the taxpayer other than a return of capital or anything that increases his net worth or anything that flows into the wealth of the taxpayer other than a return of capital. Therefore, the P50,000 from the projects is income for taxation purposes. Is the rental income? Let us say, P100,000. Is this income on the part of DSWD? Yes, because income is anything that flows into the wealth of the taxpayer or anything that increases his net worth other than return of capital. Income, from the economic point of view in taxation, is

anything that flows into your wealth or anything that increases your net worth other than a mere return of capital.

When income realized by DSWD is not subject to income tax

So are these P50,000 from projects and P100,000 rental income subject to income tax? Is the answer found in the Constitution? NO. Is the answer found in the general rule that the government is exempt from payment of tax? NO. Saan hahanapin ang sagot? Nasa codal, Sec. 27. As far as the P50,000 income from the projects is concerned, it is income and not taxable because it is in the exercise of governmental function.

But the rental income of P100,000 is out of proprietary function and therefore subject to income tax.

Donation given to DSWD is income

Sumunod na tanong: let us say that X gives DSWD P500,000, tinanggap ni DSWD. 1) Nung tinanggap ng DSWD yung P500,000 from X, is that income on the part of DSWD? YES. Because income is anything that flows into your wealth or anything that increases your net worth other than a return of capital. Sa tax, laging black or white pero konting movement, nag-iiba yung point of view. So we should get used to it. It is income because, from your end? Ang tanong is, Did it increase my net worth other than return of capital? Is it flow of wealth into me? The answer is yes and so be it, the answer is yes, it is income.

Donation to DSWD not subject to Estate or Donors Tax

When X gives to DSWD, is it subject to estate or to donors tax? Estate tax--the way or mode of transfer from X to DSWD is taking effect upon death. Testamentary succession, bequests, taking effect upon death, the question will be, Is it subject to estate tax? But if the mode of transfer from X to DSWD is taking effect during the lifetime, the question is, Is it subject to donors tax? Yan ang tatandaan ninyo. Basta ang mode of transfer ay taking effect upon death, ang laging tanong sa inyo ay estate tax. Pag nakita ninyo that the mode of transfer is inter vivos, then ang tanong sa inyo is, is it subject to donors tax? Ngayon, either way, is it subject to estate or donors tax? You will not find the answer in the Constitution. It is not in RPT. It is in Sec. 86 for Estate Tax and Sec. 101 for Donors Tax which we refer to as Transfers for Public Use. When a transfer is made in favor of the government or any of its agencies or instrumentalities, we call it transfer for public use, and if the mode of transfer is taking effect upon death, we say that the transfer is exempt from estate tax. If the mode of transfer is taking

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effect during the lifetime, we say that the same is exempt from donors tax. Donors Tax is Sec.101 and Sec. 86 is Estate Tax.

Donor can claim the gift as a deduction from Gross Income

Now from the point of view of X, can X claim the same as deduction? Magtanong kayo kung bakit maraming nagbibigay. Maraming nagbibigay dahil talagang dakila ang puso, dalisay. Pure ang intention na makatulong. But in recognition of that purity of intention and the effect of your gift, the government gives a benefit in favor of the donor and the benefit is in the nature of deductibility from gross income. May tax consequence ang pagbibigay kasi nire-recognize ng government ang pagtulong ng isang taxpayer by way of giving of gift. When X gives P500,000, it means may income siya kasi hindi siya makakapagbigay kung wala siyang kita. Yan ang tandaan ninyo. Ang presumption dito ay, si X ay may kita na more than P500,000. Kasi walang taxpayer na normal ang isipan na magbibigay ng ikahihirap nya. Kaya siya nagbibigay kasi may sobra. So pag nagbigay siya ng sobra, yung gobyerno nirerecognize natin ang purity of intention and the effect of your gift by way of allowing you to claim as deduction, the gift that you made.

Deductions that may be claimed by a purely compensation income earner

So from the point of view of X, can X claim P500,000 as deduction from his gross income? Ang sagot dito ay makikita sa Sec. 34 and 35 of the Tax Code. I dont want you to memorize these numbers. I want you to understand what these numbers provide in the Code. Can X claim the P500,000 gift as a deduction? Ito ang sagot: If X were a purely compensation income earner, ano ang ibig sabihin nito? Nagta-trabaho, employer-employee relationship, ang kinikita mo ay puro sweldo. Wala kang ginagawa kundi ang magtrabaho under an employer-employee relationship. What you earn is compensation income. You are called a purely compensation income earner and under the law, if a taxpayer or individual is a purely compensation income earner, the only allowable deductions are: (PE), Personal Exemption of P50,000; (AE) Additional Exemption of P25,000 per child, maximum of 4; and (PHHI) Premiums on Health and/or Hospitalization Insurance. Nothing more, nothing less. So if you gave P500,000 and you are working as an employee in a company, ang presumption natin ay kinuha mo ang P500,000 sa sweldo mo. Kapag nag-compute ka ba ng income tax due from your compensation for the entire year, can you claim as deduction the P500,000? Ang sagot ay: NO. Because you are allowed only PE, AE and PHHI as deduction, and donation is not PE, AE or PHHI.

Donation to DSWD may be claimed as deduction by business income earner

Now, if you were a business income earner, X may be a corporation or an individual. Whether X is a corporation or an individual taxpayer earning business income, and P500,000 is given to DSWD, then the business income earner can claim the same as a deduction in full especially if the donation is for the priority projects of the government. Well find this in Sec. 34 (h). These are the rules on the exemption from taxability of government institutions exercising governmental functions from RPT to income tax, from donors tax to estate tax. Walang ibang rules na madadagdag diyan. Kahit bali-baliktarin natin ang codal, yan lang ang pwedeng itanong sa inyo pagdating sa group na ito.

When Government Educational Institution is exempt and not exempt from Real Estate Tax

Lets take the case of a Government Educational Institution (GEI) or what we refer to as public schools, public elementary schools in far flung barangays, wherever. Public high schools, science high schools, this is what we refer to as GEI, state universities or colleges. GEI ang tawag diyan. Lets take for instance the University of the Philippines: Building 1, Building 2, may office, may swimming pool, may Building 3, Library, may Parking Lot, may canteen, at itong portion na to pinapa-rentahan na naman sa KFC, McDo and Jollibee. These agencies are paying rentals of P100,000. Yan yung physical setup.

e.g. Lay-out of the property owned by UP

Is the government educational institution subject to or exempt from payment of RPT? The basis of the answer is Local Government Code of 1991, not the tax code. What does it say? All properties owned by the government of the Republic of the Philippines shall be exempt from real property tax except when the beneficial use thereof pertains to a non-exempt entity. Following that rule, exempt or subject to tax? EXEMPT! This one (buiding 1 up to canteen)? EXEMPT. How about the portion rented out to KFC, McDo and Jollibee? TAXABLE. According to the Local Government Code of 1991, this portion will now be subjected to real property tax.

Building 1 Building 2 Building 3 Office Swimming Pool

Library Parking Lot Canteen Portion rented to KFC, McDo, Jollibee

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Tuition fee paid by students is income

The school realizes income from tuition fees. Syempre nagbabayad din naman tayo, subsidized nga lang ng gobyerno so mas maliit ang binabayaran. Is the tutition fee income revenue of the school income? Yes! Because income is anything that flows into the wealth of the taxpayer or anything that increases the net worth other than a return of capital. Is the rental income, income? Yes. Because following the same rule, anything that flows into your wealth or anything that increases your net worth other than mere return of capital is treated as income for taxation purposes.

Payment from rentals is income

Is tuition fee an income? Yes. Is payment from rentals an income? Yes.

When income is not subject to income tax

Are the tuition fee and rentals subject to income tax? Where will you find the answer? Sec. 30 of the tax code. Sec. 30 is an enumeration or list of corporations which are not subject to income tax. The first sentence of sec. 30, makikita niyo yung salitang as such. Those two words are very important in Sec. 30. Tagalugin natin. Lahat ng korporasyon na nakalista ay exempt sa income tax. Nakasulat diyan, are not subject to income tax under this title. Kung titingnan mo, ano title? Income tax. Ay hindi subject sa income tax sa income as such thats how you read it. All of these corporations shall not be subject to income tax for the income realized by them as such.

Meaning of income realized as such

What is the meaning of income realized as such? Income realized by each corporation pursuant to the primary purpose for which they are treated. One of them is a government educational institution, Sec. 30 (i). So anong ibig sabihin? Is tutition fee income, income as such? Yes. Therefore this is exempt. Rental income, income as such? No. Therefore, subject to tax.

Income from real property is subject to income tax

In addition to the first paragraph, you go to the last paragraph. Nakasulat din diyan, last paragraph, notwithstanding the provisions above, income of whatever kind or character from real or personal property or from an activity conducted for profit, regardless of disposition, shall no longer be exempt from payment of income tax. Very literal ang sinasabi ng batas. When you apply that,

P100,000 rental income is an income from real property and therefore according to the last paragraph, it is not exempt from payment of income tax.

Interest income from interest on investment, generally taxable

Let us assume that the GEI put P50,000 and P100,000 in a financial institution, earning interest of 10%. All in all P15,000. Is the P15,000 interest income, an income? Yes. Is it subject to income tax? Yes. Because according to the last paragraph of Sec. 30, income from an activity conducted for profit of the GEI, will no longer be exempt from payment of income tax. Yes or no? Yes! So this one is subject to income tax. Of course there are BIR Rulings, not BIR Regulations. The government educational institutions may seek a particular BIR ruling, if it can prove that the P15,000 income and the income from rental income will be devoted by the school for educational purpose, pwede ma-exempt. That is an exception to the rule, that is not the general rule. Without a specific ruling to the effect that this income, P15,000 and P100,000 rental ay dine-devote sa governmental purpose or sa educational purpose, hindi mae-exempt yan by reason of last paragraph of Sec.30.

Meaning of regardless of disposition

Let us assume that the P15,000 is not exempt; theres no specific ruling. P15,000 is not exempt but the P100,000 is exempt. Lets presume that the 50,000 and 15,000, 65,000 ginamit ng skwelahan, the school used the P65,000 income which is not exempt from income tax for purchase of computers, improvement of the school. Will that fact now exempt the P15,000 and P50,000 from payment of income tax? NO. Because ang sabi sa Sec.30 last paragraph ay regardless of disposition. Yan ibig sabihin nung regardless of disposition.

Gifts, bequests, devises as items of exclusion from computation of gross income

Next, X gives GEI P500,000. Is it income on the part of the school? YES. Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is it taxable income on the part of the GEI when the GEI receives P500,000? NO, because of Sec. 32 (b) (3). Gifts, bequests and devises are items of exclusion from the computation of the gross income of the decedent. Pag kayo tumanggap ng regalo, yun ay income sa inyo pero hindi siya taxable income. Hindi siya subject sa income tax. Bakit? According to Sec. 32 (b) (3), gifts, bequests and devises are items of exclusion from your computation of gross income. So pag binigyan ka ng limandaang libong piso at ikaw si GEI, income yan sa iyo. Gawin nating kayo at ako para mas madali. Kayo si GEI tapos binigyan ko

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kayo ng P500,000. Income sa inyo? Oo. Taxable income sa inyo? HINDI. Bakit? Nakasulat sa batas na lahat ng tinatanggap na regalo ay hindi part ng gross income for income tax purposes.

Gifts to Government Educational Institution not subject to estate or donors tax

Ang susunod na tanong, pag binigyan kita ng P500,000 yan ba ay subject sa estate or donors tax? You will again find the answer under the NIRC, right? If you give in favor of the government, transfers for public use again, and are therefore exempt from either estate or donors tax.

Donation not allowed as a deduction if donor is a purely compensation income earner

Noong binigay ko yan sa inyo, anong tax consequence sa akin? Pwede ko bang i-claim as deduction? The answers are the same. If Lumbera is a purely compensation income earner, eto lang tatlo ang pwede kong i-claim (PE, AE, PHHI). Therefore it cannot be claimed as deduction sa akin.

Donation allowed as a deduction if donor is engaged in trade or business

Kung si Lumbera is a corporation or individual earning business income, then I may claim the same as a deduction. Thats Sec. 34 (h) and Sec. 35 of the NIRC.

Question:

Barrister: Maam for Sec. 30 po, last paragraph, the regardless of disposition, does this fall under those characterized as one-time transactions?

Atty. Lumbera: Ah kung one-time transaction iba yan kasi one time transaction, remember that in an activity conducted for profit, the presumption is regular. Because if its a one-time transaction, you can seek for an exemption from BIR. Kasi hindi mo ma-establish that you are engaging in business activity. Ang premise dito is habitual, regular. You are entering into commercial transactions on a more or less habitual or regular basis which give you profits. Pag regular kasi yung transaction mo, commercial activities and you are a government educational institution, ibig sabihin nawawala na ang serbisyong publiko ng inyong institusyon. Thats the reason why.

Income of Government-Owned Or Controlled Corporations

So we are through with government educational institutions. If it is a GOCC pabaliktad naman. GOCC-lahat subject to tax because it is treated as an ordinary domestic corporation. Madali pag GOCC, lahat- real property, lahat yan subject to tax. Now lets continue our discussion by comparing the two with charitable, religious, educational institutions, non-stock, non-profit, stock or proprietary educational institutions (PEIs), we also have proprietary hospitals. These are some of the organizations that we have under the Constitution, under the tax code. And we are going to determine the taxability or exemption of these institutions using the same example so that you can see the variances in the rules.

CT

CHURCHES Charitable

CONVENTS A, D, E, Religious RPT

MOSQUES used Educational TAX

Non-Profit Cemeteries

P L B I

Now the Constitution states that, All churches, charitable institutions, convents, mosques, non-profit cemeteries, parsonages as well as all lands, buildings and improvements, actually, directly and exclusively used for charitable, religious and educational purpose, shall be exempt from tax. Thats Constitutional Provision NO.1. I-noun natin, dun sa elementary, may noun dito ang katapat niya charitable. Charitable institution, charitable purpose. Eto, religious walang educational na katapat sa sentence. Agree? So nagma-match yan. Magkaka-match yan. Ang sabi lahat daw ng mga institusyon na ito, kasama ang kanilang lupa, lahat ng building at lahat ng improvements doon sa lupain ay libre saan? Tax. Anung klaseng tax? RPT lang yan. At kaya libre sa tax eh dahil ginagamit actually, directly and exclusively for charitable, religious. So, ito ang laging tatandaan. Sa tax kasi this is very helpful. You dont read the provisions of the law which are very long. Sundan lang ang outline, tagalog version, English version, easy to understand.

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Requirement for exemption from RPT

So what makes the exemption? The USE, regardless of ownership. So even if an entity which is not exempt allows these institutions to use it for these purposes, that property will be exempt from tax because ownership is not important. The use of the property is important. So kahit sinong may-ari. Basis? Constitution and the Local Government Code of 1991.

Exempt property No. 2. One is government, exempt property No. 2 All real properties actually, directly and exclusively used for charitable, religious and educational purposes. Sa Local Government Code of 1991 nakalagay yan. It shall be exempt from RPT.

Determination of purpose of a charitable Institution

Lets take the case of a charitable institution. Lets say that this is Bahay ng Mga Taong Walang Pag-asa (BTWP). Kinukupkop ang mga tao diyan, mga taong walang pag-asa. How will you know if it is a charitable institution? You look at the incorporation documents, the SEC documents. Because each charitable institution should be registered as a charitable institution with documents, registered before the SEC, wherein the primary purpose is stated. Doon niyo makikita yan. Without any document proving that indeed the organization is a charitable one, no exemption will be allowed.

Exemption of a charitable institution from payment of Real Estate Tax

Let us say that this is Building1, Building 2, it has a canteen, kitchen, office, park, entertainment area, parking lot, plus KFC, McDo, Jollibee, paying rentals of P100,000 to BTWP, a charitable institution. Is it subject to or exempt from the payment of RPT? Are the Building1 to Parking Lot exempt from payment of RPT? EXEMPT. Basis? Constitution and the Local Government Code of 1991 which states expressly that, all real properties actually, directly and exclusively used for charitable, religious and educational purpose shall be exempt from payment of RPT.

Income realized from projects is subject to income tax

Now, yung mga tao diyan kinukupkop ay nag-aaral ng technical or vocational courses. Gumagawa ng proyekto: basahan, Christmas cards, Christmas baskets, bags out of paper, all of these things. So, the institution realizes income, not from tuition fee but from projects. P50,000. Income on the part of the institution? YES. Why? Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is the P100,000 rental income, income? Yes. Is the P50,000 income from the project subject to income tax? When you look at the constitutional provision, can you say that it is exempt or that it is not exempt? No, you cannot. Kahit bali-baliktarin natin yan hindi natin malalaman kung yung P50,000 ay subject sa income tax. Bakit? Kasi ang coverage nito ay RPT, hindi income tax. So saan makikita ang sagot? CODAL. Nakasulat diyan, Sec. 30 again, Sec. 30 (e). Nakasulat sa batas na ang income ng isang institusyon which is created for charitable purpose, income as such, shall be exempt, and therefore the P50,000 income is income as such, exempt from income tax.

Rental income is subject to tax

What about the rental income? Again we go back to last paragraph of Sec. 30, income of whatever kind or character from real or personal properties or from an activity conducted for profit comma regardless of disposition comma shall be subject to tax. Hindi niyo makikita and sagot sa constitutional provision. Bakit? Kasi RPT lang pinag-uusapan sa Constitution. Sa codal, NIRC, nandoon ang kasagutan kung bakit yung dalawang income ay taxable o hindi.

Donation given to the charitable institution not subject to income tax

Now lets continue, X gives P500,000 to the charitable institution Bahay ng Mga Taong Walang Pag-asa (BTWP). Charitable institution. Kanina, gobyerno ang binigyan, sumunod ay government educational institution, ngayon charitable institution. Is it income on the part of the charitable institution? YES. Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is it subject to income tax? Is the P500,000 gift from X and received by the charitable institution taxable income? NO. Because of Sec. 32 (b) (3), gifts bequests and devises are items of exclusion from the computation of the gross income. So from the point of view of the recipient, thats income but not taxable income. Basis? Not the constitution but the tax code.

Building 1

Building 2 Canteen Kitchen Office

Park Entertainment Area

Parking Lot

Portion rented to KFC, McDo, Jollibee

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Gift given to the charitable institution, not subject to Estate or Donors Tax

If you give in favor of the government, it is not subject to estate or donors tax. 100% exempt. If you give to a charitable institution and the question is, is it subject to estate or donors tax? It will not be subject to either estate or donors tax, provided, that not more than 30% is used for administration purposes. Nakalagay yan, Sec. 87 and 101 of the tax code. So theres a qualification. It cannot be subject to estate or donors tax, provided, that the donee does not use more than 30% of the gift or the donation for administration purposes.

Gift is subject to Estate or Donors tax if more than 30% of the gift is used for administration purposes

What if ikaw na donee eh ginamit mo ang more than 30% ng binigay ko para sa administration purposes? Ang sagot lang diyan ay simple. Nagbibigay ka para makatulong sa institusyon, hindi para paswelduhin ang mga tao na empleyado ng institusyon. Hindi para bayaran ang kuryente ng institusyon at hindi para bayaran ang telepono, sabon, tubig. Hindi ganyan ang pagbibigay ko. Ang pagbibigay ko ay para makatulong sa mga taong walang pag-asa na magkaroon ng pagasa. Thats the reason why I am giving and that is why there is a requirement that when the donee (recipient) uses more than 30% for administration purposes, then the entire donation or gift will be subjected to donors or estate tax. The reason I am giving you is not for you to live but para matulungan yang mga taong yan. Kung bubuhayin lang din kita eh hindi yan donasyon sa akin, hindi kita binibigyan ng pag-asa na mabuhay. Ang binibigay ko sayo ay pera para mabuhay ang institusyon. So, if you violate that rule then I have the right to cancel the donation. If theres a condition for the gift and the donee violates the condition for the gift, the donor has the right to rescind, Thats the logic.

Gift given to the charitable institution as deduction

Now on the part of X, can X claim as a deduction the amount of P500,000 given to the charitable institution? If Lumbera is a purely compensation income earner, only three (3) are allowed as deductions (PE, AE, PHHI) and this is not one of the three. Therefore, no deduction can be allowed.

But if Lumbera were a corporate taxpayer or a business income owner individual, and she gives P500,000 to the institution, she has the right to claim it as deduction, with limitation. Whats the limitation? If Lumbera were a corporate taxpayer, deduction is limited to 5% of my taxable income only. And if an individual, 10% of my taxable income. What does it mean? Si Lumbera is a

corporate taxpayer, which gave out P500,000 to the charitable institution. Ang assumption natin is yung amount na binigay ko galing sa income ko from business. But I have the right to claim as deduction only to the extent of 10% of my taxable income, not 10% of the donation. 10% of my taxable income.

If my taxable income for the year 2011 is P1,000,000 and I donated P500,000 to the charitable institution, my deduction as a corporation is only equivalent to 5%, so P50,000 lang. Out of my gift, yung P450,000 walang effect sa akin. Hindi natin sinasabi na wag ka na magbigay ng pera kung singkwenta mil lang. Ang sinasabi natin, pag nagbigay ka, salamat, pero ang tax consequence sa iyo, Lumbera, ay hanggang sampung porsyento lang at hanggang limang porsyento lang kung korporasyon sa taxable income. The P450,000 is a gift but it will have no effect on the part of the donor. If si Lumbera is an individual, according to Sec. 34, it will be limited by 10%, up to P100,000 lang ang magiging tax effect sa akin out of the P500,000 gift that I made. Yun yung Sec. 34 (h), makikita niyo yan.

Religious institutions

Lets talk about religious institutions. Again, the Constitution states: Churches, convents, mosques, non-profit cemeteries, parsonages, as well as all lands, buildings and improvements therein actually, directly and exclusively used for religious purposes shall be exempt from RPT. So lets change it to a religious institution. San Beda, the school, is not the religious institution. San Beda-Order of St. Benedict (OSB), is the religious institution. Here we are talking about OSB, the religious institution, not San Beda the school. If we will talk about the School-San Beda, San Beda, the school will be covered by the other constitutional provision, not by this one. If we are talking of OSB, the religious institution, like Iglesia ni Cristo, Roman Catholic Church, Jesus Is Lord Movement, Lahat ng yan. These are the religious institutions.

Lumberas taxable income for 2011

Donation

Allowable deduction for gift

P1,000,000

P500,000

10% of taxable income P1,000,000 x10%=P100,000 (if individual) 5% of taxable income P1,000,000 x 5%=P50,000 (if corporation)

9



Determination whether organization is a religious institution

Again, the requirements are that: in the articles of incorporation, it is incorporated as an organization and there are documents showing that it is a duly organized group. Without that proof, you cannot claim the exemption.

Properties and income of a religious institution

So lets take the case of the Church, Katolikong Simbahan. Roman Catholic Church. So eto ang simbahan, bahay/parsonage ng pari, quarters, theres a park, canteen, kitchen, office, parking lot, portion rented to KFC, McDo and Jollibee. Pagka-panganak bibinyagan, magbabayad sa opisina, mass sa binyag, special mass-mahal, susunod kumpil, mass sa kumpil special kumpil--bayad ka. Araw-araw ng buhay natin tayoy nagpe-petisyon. Simula ngayon ang inyong petisyon ay: pumasa sana ako sa 2011 bar examinations. At kayo namang mga nasa college of law: sanay wala akong bagsak at maka-enroll ako sa June! Ang mga petisyon nating yan, bayad na naman tayo sa opisina, singkwenta pesos, trenta pesos. Pag tayoy nag-asawa, ganun na naman, bayad, depende kung may bulaklak, may carpet, mass sa kasal, special kasal, limang pari, walong pari, Obispo, whatever, iba ang rate. Pag namatay ka, ganun din-bebendisyunan ka, last rites, mass sa funeral o special, depende sa misa, kung ang mass ay full-blown na misa o di kaya eh may choir na kumakanta na tatlong oras tama ba? Iba-iba ang bayad natin. So these amounts of money go to the office. You pay, theres a receipt.

Now habang nagmimisa, habang may serbisyo ang mga pari, pagkatapos non kakain ang mga pari, masarap ang kain, hipon, alimango. Plus may, father pasensya ka na, merong envelope yan ang ginagawa natin, dahil ang paniniwala natin sa relihiyon ay nagdadala sa atin sa langit pagdating natin sa kabilang buhay. Di tayo dadaan sa purgatoryo, at hindi rin tayo pupunta sa impyerno. Diretso nang langit. Thats the exercise of our faith, so yan ang ating paniniwala at yan ang ating mga kustumbre sa relihiyon.

Real property of religious institution exempt from real estate tax

Ngayon eto bang property na ito ng simbahan ay subject sa real estate tax or hindi? Lahat ng ito, except this portion rented to KFC, McDo, Jollibee, will be exempt from real property tax. Basis? Constitution. Maliwanag pa sa sikat ng araw. Itong portion rented to KFC, McDo, Jollibee ang hindi exempt. Bakit? Because it is not actually, directly and exclusively used for religious purposes.

Income of Church, not subject to income tax

Lets talk about the income of the church. P50,000 out of pamisa, pabinyag, pakumpil. Income? YES. Yung mga pamisa ninyo sa simbahan. Yan bay income? YES. Is it subject to income tax? Can you use again as basis the Constitution? No, again because the Constitution only pertains to RPT. So what again will be the basis for your answer? Sec. 30 of the Tax Code. Nakasulat na naman diyan, paragraph (e). So is it subject to income tax? NO. Because according to sec. 30, this is income as such of an organization devoted for religious purpose and therefore exempt.

Rental income paid to religious institution, subject to income tax

What about the income from rent paid by KFC, McDo and Jollibee? Income? YES. Subject to income tax? YES. Whats the basis? Not the Constitution, but the last paragraph of Sec. 30 which states that, income of whatever kind and character from real and personal properties or from an activity conducted for profit, regardless of disposition, shall no longer be exempt from payment of income tax.

Interest income of religious institution, subject to income tax

If the Church decides to put the money in a lending institution, financial institution, earning interest, is it income? YES. Subject to income tax? YES. Basis? Last paragraph of Sec. 30.

Donation given to the Church, not subject to income tax

Now lets continue, X gives P500,000 sa simbahan sa paniniwalang kung nagbigay sa simbahan eh sa langit didiretso. Pero maraming nagbibigay sa simbahan kasi ganyan tayong mga Pilipino. So, nagbigay sa simbahan, income on the part of the church? Yes. Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is it taxable income on the part of

Simbahan Parsonage Quarters Park Canteen

Kitchen Office Parking Lot Portion rented to KFC, McDo, Jollibee

10



the church? No. Because, gifts bequests and devises are items of exclusions from the computation of the gross income of the church.

Income of the priest and income tax consequence

Question, what about those that you give to the pari? Income on the part of the pari? Yes, because that increases his net worth. Is it taxable income on the part of the pari? Dalawa ang sagot diyan.

1) One is that this is income but not taxable because it is in the nature of a gift. Ibinigay mo kay father, ang konsiderasyon gratuitous. Now if you give it to the pari because it is in the form of a gift, it is true that it is income but it is not taxable because of Sec. 32 (b) (3) but it should be subjected to donors tax. It should be subjected to the rules of donors tax.

2) The other answer is, it is considered as income because it is an income from exercise of profession. Hindi naman ako nagbibigay sa pari dahil pari siya. Nagbigay sa pari dahil nagbigay siya ng serbisyo. In consideration of the services rendered by the priest, it should be treated as income and taxable income in the exercise of profession, but not subject to donors tax.

Ako (Atty. Lumbera), personally, I consider that as taxable income because the reason that I give it to the priest is because of the service that he renders although ang nature nga ng serbisyo is religious. So, thats an exercise of profession and therefore it should be treated as taxable income. What kind of income is that? Income from exercise of profession, but it will not be subjected to donors tax because I did not give it gratuitously without consideration. I gave it for the service rendered by the priest.

Gift given to the Church, not subject to estate or donors tax

X gives P500,000 to the Church. Income? Yes. Taxable income? NO. Is it subject to estate or donors tax? No, provided, not more than 30% is used for administration purposes.

When gift may be claimed as a deduction by the donor

Is it allowed as a deduction on the part of the donor? Now, if X the donor, were a purely compensation income earner, he cannot claim as a deduction even a single centavo of the P500,000. Pag binigyan ko kayo ng limandaan, pwede ko ba yon i-deduct sa akin (purely compensation income earner)? HINDI. Kasi sakin, tatlo lang ang pwede (PE, AE, and PHHI). Pag corporation or tao na engaged in trade or business, limited ang deduction ayon sa Sec. 34 by 10% kung tao and 5%

kung korporasyon. The rules are the same for religious and charitable institutions. Walang pinagkaiba.

Non-stock non-profit educational institutions

Non-stock, non-profit educational institutions. Lets change this to a school. Kanina GEI. Ngayon non-stock, non-profit educational institutions. Private but non-stock, non-profit. Ang konstitusyon nakalatag, madaling intindihin. Yan din ang ia-apply natin. So lets say that this is a school, non stock non-profit. How do you know that?

Determination whether school is a non-stock non-profit educational institution

Nakasulat na naman sa articles of incorporation at sa by-laws. What are the indicators of a non-stock non-profit institution? Nakalagay yon: governed by a board of trustees instead of a board of directors, walang dividends distributed, the income of the organization is not distributed to the members. These are the indicators that an organization is a non-stock, non-profit institution. But of course it should be registered with CHED kasi educational institution to may special permit from DepEd or the CHED in case of tertiary schools.

When School is Subject to or Exempt from Real Estate Tax

Portion rented out to KFC, McDo, Jollibee

Building 1 Building 2 Park Dorm 1 Canteen 1

K A L Y E

Canteen 2 Dorm 2

So yan ang eskwelahan, dagdagan natin (portion rented to KFC, McDo, Jollibee, building 1, building 2, park, merong dorm at may canteen sa loob ng campus, at eto ang kalye, meron ding dorm 2 at canteen 2 sa labas ng campus) yan ang set-up. Is the school subject to or exempt from payment of real property

11



tax? Building 1 & 2, park and canteen 1--exempt. The dorm? Exempt? YES because that is actually, directly and exclusively used for educational purpose.

Ilagay natin to, Constitutional Provision No. 2. So ang sabi naman dun sa isang constitutional provision, All revenues and assets of non-stock non-profit educational institutions as well as all lands, buildings and improvements actually, directly and exclusively used for educational purpose shall be exempt from taxes and duties. Taxes here refer to all national internal revenue taxes, duties here refers to tariff and customs duties. So if you compare the two, this one is a lot broader than this (constitutional provision No. 1). Because there, the constitutional exemption is limited to RPT, here, all internal revenue taxes and tariff and customs duties. So makikita niyo agad ang distinction sa constitution pa lang.

Application of the constitutional provisions

How do we apply the rules? Basically pareho but meron lang konting variance yan. So lets take the case of a non-stock non-profit educational institution. Question in your mind? San kaya ang gamit nito e meron namang ganito (Constitutional Provision No. 1)? Ano bang mali doon? Churches mosques, convents, parsonages, non-profit cemeteries, charitable institutions actually, directly and exclusively used for religious, charitable and educational purpose. Bakit ganon eh meron namang constitutional provision na devoted for educational purpose? Bakit hindi na lang siya tinanggal?

Kasi po may mga institusyon na charitable at religious na incidental to charitable and religious purposes meron silang educational purpose. Incidental, hindi primary. Incidental, katulad ng ibang mga simbahan, sa kabilang gilid eh may day care center sa mga batang tinuturuan. Nagtuturo ng katekismo, catechism classes. Incidental lang siya na educational pero hindi sya skwelahan na established separately from the religious institution.

Just like what I mentioned to you earlier, if we talk about San Beda, the school, which is a non-stock non-profit educational institution, this is the provision applied (CP No. 2), not that one (CP No. 1). But if we talk about OSB, the religious institution, dito tayo (CP No. 1). Pag sinabing San Beda, the school, eto tayo (CP No. 2). Maliwanag ang demarcation line sa constitutional provision.

When property located outside the school campus is subject to or exempt from real estate tax



K A L Y E

Canteen 2 Dorm 2

So balik tayo, building 1, building 2, park, dorm1, canteen1-exempt from RPT. Basis? Constitution and Local Government Code of 1991. This portion rented out to KFC, MCDO, Jollibee is not exempt because this is not actually, directly and exclusively used for educational purpose. Now, are these dorm 2 and canteen 2, which are outside of the campus, maintained and operated by the school, subject to real estate tax or exempt? Ano lang ang criterion? Actually, directly and exclusively used for educational purpose.

If the circumstances of the dormitory outside the campus give us the impression that the same is actually, directly and exclusively used for educational purpose, anong scenario? Ang mga studyante lang ng eskwelahan ang pwede tumira, educational purpose. Ibig sabihin, exempt. Pero kung ang dormitory na ito, ang kalahati eh yung mga trabahador diyan sa gilid ng eskwelahan pinapatira diyan, hindi na exclusively for educational purpose. Therefore, hindi na magiging exempt. Kayo-studyante, puno na si dorm 1, sabi ng San Beda dun na kayo sa dorm 2 lahat, exclusively for students of San Beda. Exempt or not? EXEMPT.

When property is not exempt from real estate tax

Pero kung sabi ng San Beda, why dont we just also cater to those who are working, who are not students but are working in the companies in Alabang. Yun bang dorm na yan ay subject to real estate tax? OO. Bakit? Because its no longer actually, directly and exclusively used for educational purpose. Same thing. Whats the difference between this canteen and this one? This one caters exclusively to students (canteen 1). This one (canteen 2) may cater to students or even the outsiders. That will contribute to the loss of the exemption because it is no longer actually, directly and exclusively used for educational purpose.

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Dorm and canteen inside school, operated by concessionaire

Lets have a variance. Dorm and canteen maintained and operated by the school is exempt from real estate tax. Dorm and canteen operated by the concessionaire, subject to real estate tax or not? Agreement with the concessionaire is, I pay the school 10% of gross sales, thats the agreement. Is it subject to real property tax or not? EXEMPT. Bakit? Ang sinasabi actually, directly and exclusively used, hindi naman sinasabi na actually, directly and exclusively maintained and operated by the school. Ginagamit ba exclusively for educational purpose? Yes. Then, still exempt.

Dorm outside campus, maintained by concessionaire, subject to real estate tax

These two (dorm 2 and canteen 2), operated and maintained by concessionaire, subject to real estate tax? Yes. Bakit? Kasi kahit sino ang nagme-maintain, ang tinatanong sa real estate ay ano? GAMIT. USE. Ginagamit ba? Aba eh pag nasa labas ng campus most likely yan ay hindi ginagamit para sa eskwelahan kaya yan ay hindi exempt. Titignan ang circumstances. Ganito mag-interpret ng batas sa tax. Hindi yung codal lang tas walang titingnan sa riyalidad. Lahat ng riyalidad titingnan mo. Anu-ano ba yung mga nandiyan? Mga estudyante ba lahat diyan o baka naman nagpapaupa ka na ng mga iba diyan? Kung nagpapaupa ka na diyan, nawala na ang ADE (actually, directly and exclusively used for educational purpose). Kaya hindi na siya pwede ma-exempt.

Income from tuition fee

The school realizes income-tuition fee, income? YES. Subject to tax? Non-stock non-profit educational institution realizing income from tuition fees paid by students. Ang San Beda ba ay exempt from income tax for the tuition fees that you pay? Yes or no? YES. Basis? Syempre ang una niyong titingnan ay Constitution. Base sa Constitution, pag kayo nagbayad ng tuition fee sa akin (San Beda), exempt na ba yun? Hindi. Kasi ang sabi sa konstitusyon ay, revenues, assets, actually directly and exclusively used. Kasi pag revenues ang pinagusapan, tandaan ninyo, either the source of the revenues dictate the exemption or the use of the revenues. Nevertheless, according to Sec. 30 (e), exempt yung tuition fees na binabayaran. Tuition fee income of a non-stock, non-profit educational institution shall be exempt from payment of income tax. Basis? Sec. 30 (e).

Rental income from KFC, McDo, and Jollibee

Rental income from KFC and McDo. Income? YES. Taxable? Subject to tax. YES. Basis? Last paragraph of Sec. 30.

Interest income of the school

If you put the income in a financial institution with interest, the interest is income but taxable. Basis again? Sec. 30, last paragraph, not the Constitution. Always go back to that.

Payment of students for dorm and canteen

Kanina real property tax ang pinag-uusapan, dorm and canteen maintained and operated by the school. Yung binabayad ninyo sa dorm and canteen pag kumakain kayo, income? Yes. Taxable income on the part of the school? Yes. Exempt o taxable? TAXABLE. Basis? Last paragraph of Sec. 30. You will imagine ha, na lahat ng bagay doon umiikot. Kasi nandun lang eh. Taxable? OO. Ano sabi ng batas? Notwithstanding the provisions, income of whatever kind and character from real or personal properties, or activity conducted for profit comma regardless of disposition comma shall no longer be exempt from payment of tax.

Payment of concessionaire to the school

Now, lets change the scenario. Dorm and canteen operated by a concessionaire. The payment of the concessionaire, income? YES. Subject to tax? YES! Basis? Last paragraph of Sec. 30. That is already income from an activity conducted for profit.

Income paid to dorm and canteen outside campus

Dorm 2, canteen 2, operated and maintained by the school. Payment for the dorm and canteen food, income on the part of the school? YES. Subject to income tax? YES. Basis? Last paragraph of Sec. 30.

Amount paid by concessionaire for income from dorm and canteen outside campus

Outside of the campus, operated and maintained by a concessionaire, the amount paid by the concessionaire, income? YES. Subject to tax? YES. Basis? Last paragraph of Sec. 30. Hindi siya mahirap. Kailangan lang alamin niyo ang sitwasyon para alam ninyo kung ano ang ia-apply in relation to the Constitution.

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Donation given to school, not subject to income tax

X gives P500,000 to the school, income? YES. Is it taxable income on the part of the school? NO. Because gifts, bequests and devises are items of exclusions from the computation of the gross income of the school.

Donation not subject to estate or donors tax

Subject to estate or donors tax? NO, provided, not more than 30% is used for administration purposes.

Gift as a deduction from gross income of donor

When X gives P500,000 to the non-stock non-profit school, can X claim as deduction the P500,000 gift? If X were a purely compensation income earner? NO. Not a single centavo. Thats not Personal Exemption, thats not Additional Exemption, thats not PHHI.

Now if X were a business income earner, can X claim as deduction the amount given to the non-stock non-profit school? YES, but with limitation. If X were a corporation, up to 5% of his taxable income prior to deduction. And if an individual, then up to 10% of the taxable income prior to deduction of the donation.

Determination whether school is a Proprietary Educational Institution (PEI)

Next, Proprietary Educational Institutions. Sa madaling sabi, what are the indicators that the school is a proprietary educational institution? It is a stock corporation, governed by a board of directors, profits and surpluses are distributed as dividends to the stockholders. But whether PEI or non-stock non-profit, dapat pareho yan registered sa DepEd or sa CHED if youre maintaining a tertiary level educational institution. Kasi hindi naman pwede magkaron ng eskwelahan na walang permiso. So these are the indicators.

Paragraph 2 of Constitutional Provision No. 2

Now, parehong pareho. RDL School of Cosmetology. Yan ang skwelahan ko, parehong pareho ang physical set-up. What are the rules that well apply if it is a PEI? Sabi sa konstitusyon, yung No.2 na constitutional provision, meron yang second paragraph. Subject to the limitations provided for by law, proprietary educational institutions may likewise be exempt from payment of tax. Ano ang ibig sabihin niyan? Ibig sabihin niyan, ang PEI ay hindi exempt. Mae-exempt lang siya kung merong batas na nage-exempt. In short, they are not exempt. Theyll only be exempt if there is a law exempting them.

Properties inside the campus of the PEI exempt from real property tax



K A L Y E

Canteen 2 Dorm 2

So how do we treat the assets and the revenues of a PEI? Lets talk about RPT. Building 1, building 2, park, dorm1, canteen 1, canteen and dorm operated by the school, are these subject to real property tax or exempt? Can you use as basis the Constitution? NO. Sabi nga nila taxable eh. So dapat raw taxable yan unless there is a law exempting them. So anong babalikan nating batas? Local Government Code of 1991 which states that, All real properties actually, directly and exclusively used for charitable, religious and educational purpose shall be exempt from tax. So ano ang kongklusyon natin? Basta ginagamit sa pagaaral, kahit ang gumagamit o ang mayari ay non-stock non-profit or proprietary educational institution, EXEMPT.

Reason for exemption from real estate tax of properties used for education

Kasi nire-recognize ng batas ang kontribusyon ng pag-aaral ng edukasyon sa development ng bansa. So theres no distinction. For real property tax purposes, whether the educational institution is non-stock non-profit or a PEI, EXEMPT ang real property actually, directly and exclusively used for educational purpose. So here, dorm1 and canteen1 are exempt whether operated by the school or a concessionaire.

Dorm and canteen outside the PEI

Dorm2 and canteen2 if operated by the school exclusively and we can establish that this is actually, directly and exclusively used for educational purpose, then it may be exempt. But in general, since it is outside of the campus, we cannot establish the exclusivity of the use for educational purpose and therefore these dorm2, canteen2 will not be exempt from real property tax.

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Portion rented to KFC, McDo, and Jollibee

So the portion rented to KFC, McDo, Jollibee will not be exempt because it is not actually, directly and exclusively used for educational purpose.

Preferential tax rate of 10% for proprietary educational institutions

Tuition fee income and rental income. Is tution fee an income? YES. Rental, income? YES. Subject to income tax? Can you use as basis the constitution? NO. What will be the basis of our answer? Sec. 27 (b). Sabi diyan sa Sec. 27(b), ang PEI plus proprietary hospitals ay isa-subject sa tax at a rate of 10%. Ang regular rate ng corporate tax ay 30%, so hindi itong 30% kundi 10% kung ang kinikita nila sa unrelated trade or activity ay mas mababa sa singkwenta porsyento (50%) ng suma total na kita. Pag naman mas mataas ang kinita sa unrelated trade or activity, sobra ng singkwenta porsyento sa suma total na kita, hindi siya bibigyan ng preferential tax treatment. In English, the PEI/ PH shall be subjected to a preferential tax rate of 10% only if the income from unrelated trade or activity does not exceed 50% of its total income. Conversely, if the income from unrelated trade or activity exceeds 50% of its total income, then the 10% tax will not be applied, regular tax will be applied.

Unrelated Trade or Activity (UTA)

So lets take our example, income from tuition fee is P50,000. What is an unrelated trade or activity? Unrelated trade or activity is an activity pursued by the PEI which is not in accordance with its primary purpose. So yung tuition fee ay related trade or activity. Kaya nagbabayad ng tuition fee ay para sa pag-aaral, yung rental income unrelated trade yon.

Income from tuition fee P 50,000

Income from unrelated trade P100.000

Total P150,000

50% of P150,000 is P75,000- 30% rate applies

If the income from unrelated trade or activity exceeds 50% of the entire income, the entire income is taxed at the regular rate of 30%. If its the other way around:

Income from tuition fee P100,000

Income from unrelated trade P 50,000

Total P150,000

P50,000 does not exceed 50% of P150,000 which is P75,000. The entire income shall be taxed at the preferential rate of 10%.

PEIs distinguished from charitable, religious and non-stock non-profit cducational Institutions

Unlike in charitable, religious and non-stock non-profit, you segregate. You take the income independently of each other and then you apply the rules independently. If youre talking about PEIs, the income is grouped together and its either taxed at 10% (all) or all at 30%. Now the preferential tax treatment will be allowed only if the income from unrelated trade or activity does not exceed 50% of its total income. Otherwise if it exceeds, the P150,000 will be subjected to tax at 30%. Just like an ordinary domestic corporation. So the exemption is not full, this is only partial exemption. Thats what we are saying.

Interest income of PEI from lending institution

Now what if the school decided to put the money in a lending institution earning income of P15,000. Interest, income? YES. Is the interest of P15,000 in our example subject to income tax? Pano na naman gagawin diyan? Isasama yan as UTA (Unrelated Trade or Activity). Mababago ngayon yung sum total. You dont take the income independently of each other. You just group them into either Unrelated Trade or Activity (UTA) or RTA (Related Trade or Activity) and then you get the sum.

Income from tuition fee (RTA) P100,000

Income from interest (UTA) P 15,000

Income from unrelated trade P 50,000

Total P165,000

15



If the income from unrelated trade or activity does not exceed 50% of its total, then the total is taxed at 10%. If it exceeds 50%, the total is taxed at 30%. Hindi to full exemption, partial only. Ok?

Donation given to PEI, not subject to income tax

X gives P500,000 to the school (PEI). Income on the part of the school? YES! Is it subject to income tax? NO! Because gifts, bequests and devises are items of exclusions from the computation of the gross income of the school. Pag tumanggap ka ng regalo, yan ay income pero hindi taxable. Bakit? Ang sabi ng batas excluded.

Donation given to PEI, not subject to estate or donors tax

Now, is it subject to estate or donors tax pag nagbigay ka sa PEI? Pag ikaw ay nagbigay para sa edukasyon, ano ang primary consideration natin kung bakit ine-exempt? Kasi pag ikaw ay nagbigay para sa edukasyon, ang edukasyon ay nagdudulot ng kaunlaran ng bansa at dahil diyan ay hindi yan isa-subject sa estate or donors tax, Provided, that not more than 30% is used for administration purposes.

Gift given to PEI may be claimed as a deduction

Next, can X claim the same as deduction from gross income? Kung nagbigay ako sa San Beda, PEI, pwede pa ba yun i-claim as deduction? YES. Pero subject to the 10% (for individuals) and 5% (corporations) restriction.

Determination whether institution is a charitable or proprietary hospital

Balikan natin, Proprietary Hospital (PH), versus a Charitable Hospital (CH). Ang isang ospital ay charitable kung ayon sa kanyang articles of incorporation, ang purpose ay charity, non-stock non-profit at ang purpose is for charity. Kahit pa yan ay may paying clients and patients. Lets make a distinction. What is a charitable hospital versus a proprietary hospital?

All real properties of proprietary hospital subject to real property tax

Ano ang set up ng ospital? Lagyan natin ng school, complete with nursing school! Parang St. Lukes katabi ang Trinity College of Asia. Ang studyante ng Trinity College dun nagpa-practice sa St. Lukes. Pero ang school hindi part ng ospital, separately incorporated. So pag eskwelahan ang pinaguusapan, ano ang ia-apply? Ang itatanong niyo, charitable or proprietary? YAN. Titignan, stock ba? STOCK. Non-stock? NON-STOCK. Yan ang mga rules. O meron ditong ward. So proprietary hospital with charity ward. May laboratory, canteen, may KFC, McDo, Jollibee, may flower shop at may medical arts building. Yan, lets take the very simple case of a proprietary hospital with this layout.

Ang tanong natin, yan bang ospital ay exempt from real property tax for all the real properties? NO. Not a single square inch of the hospital will be exempt. Bakit? Because it is a proprietary hospital at ang nakalagay sa Local Government Code ay, Only those properties which are actually, directly and exclusively used

Charitable Hospital Proprietary Hospital

Incorporated as a charitable institution Not a charitable institution even if it has a charity ward

Non-stock, non-profit (even if it accepts paying patients)

Stock corporation

Governed by board of trustees Governed by a board of directors

SCHOOL BUILDING 1 BUILDING 2

CHARITY WARD CANTEEN LABORATORY

PHARMACY DORM OFFICE

MEDICAL ARTS BUILDING

FLOWER SHOP PORTION RENTED TO KFC, McDo, Jollibee

16



for charitable, religious and educational purpose, so hindi yan nagfo-fall doon. Everything will be subjected to real property tax.

Income of hospital

Kumikita ang ospital saan? Bayad ng pasyente, board and lodging, laboratory fees, professional fees paid to the doctors and rentals of doctors in the medical arts building. What will be the tax treatment of these income of the proprietary hospital? You apply Sec. 27 (b). Hahanapin ang unrelated trade or activity at ang related trade or activity. At ano ang unrelated?

UTA: Rental income from KFC, McDo, Jollibee

Rental income from doctors in medical arts building

So these two will be the income from unrelated trade or activity. Go back to the computation. If the UTA does not exceed 50% of its total income, then taxed at 10%. If it exceeds, everything is 30%.

What about income from laboratory fees? X-ray, HIV test, lahat, stool test, urinalysis. Income yan, related yan. So therefore, dun siya sa related trade or activity.

Charity ward of proprietary hospital exempt from real property tax

Eh papano kung may charity ward? The fact that there is a charity ward and it accepts patients without paying board and lodging, does it mean that the hospital is no longer a proprietary hospital and already non-stock non-profit? NO. It doesnt change the nature of the organization. But what is the effect of the charity ward? In the famous case of Lung Center of the Philippines, yung portion na may charity ward, iyon ang pwedeng ma-exempt from real property tax. Portion by

portion ha. Yung charity ward portion, that portion can be treated as devoted for charitable purpose and therefore may be exempt from the payment of real estate tax.

Charitable hospital

Pano naman kung charitable hospital? Eh di palitan natin. It will be treated purely as a charitable institution and all the rules applicable to a charitable institution except the physical hospital will be applied.

Lets have a run down. So dito, lahat ng yan ay exempt from real property tax, pero itong medical arts building portion, hindi exempt. Bakit? Because this is not actually, directly and exclusively used for charitable purpose. Ang hindi lang exempt ay ang Medical Arts Building and the portion rented to KFC, McDo, Jollibee because this is not actually, directly and exclusively used for charitable purpose. But the rest will be exempt from RPT. Basis? Constitution and Local Government Code of 1991.

Other income

What about the income from board and lodging, laboratory fees, examinations, rental income from medical arts building, from the pharmacy, from the canteen, how do we treat these income? Very simple. Income as such, EXEMPT. But the rental income from the medical arts building and rental income from KFC, McDo, Jollibee, according to last paragraph of Sec. 30, income of whatever kind and character from real or personal properties or from an activity conducted for trade or profit, regardless of the disposition, shall no longer be exempt from payment of tax.




MEDICAL ARTS BUILDING FLOWER SHOP PORTION RENTED TO KFC, McDo, Jollibee




MEDICAL ARTS BUILDING

FLOWER SHOP PORTION RENTED TO KFC, McDo, Jollibee

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Donation given to charitable hospital, not taxable income

Now if theres a donation in favor of the charitable hospital, is it income? YES. Is it taxable income? NO. Because gifts, bequests and devises are items of exclusion from the computation of the gross income.

Donation to charitable hospital, not subject to estate or donors tax

Is it subject to estate or donors tax? NO, provided, not more than 30% is used for administration purposes.

Gift to charitable hospital claimed as a deduction

Can X, the donor, claim the same as a deduction? We apply the same rules. It is subject to the 10% (for individuals) and 5% (corporations) restriction.

KINDS OF TAXPAYERS

A. Estate and trust

Estate and trust are treated as individual taxpayers for purposes of taxation. TRUST, from the time of the creation and while the property is in the possession of the trustee prior to distribution to the beneficiary. This transitory period, the trust is an income tax payer classified as an individual taxpayer.

B. Corporations

Now lets go to corporations. A domestic corporation is one organized in accordance with Philippine law even if there is foreign equity. A resident foreign corporation (RFC) is one which is incorporated in accordance with a law other than the Philippines which is engaged in trade or business in the Philippines.

RFC is a foreign corporation engaged in trade or business. Ang counterpart niya is non-resident alien engaged in trade or business (NRAETB). A non-resident foreign corporation (NRFC) is a corporation even with Philippine equity but not engaged in trade or business and the counterpart in individuals is a non-resident alien not engaged in trade or business (NRANETB). Yan yung magkakatambal.

When Corporation is deemed engaged in trade or business

Now how do we know if a corporation is engaged in trade or business or not? We have the same criteria except the 180-day period. It does not apply to

corporate taxpayers. So putting up of branches here in the Philippines, engaging in commercial transactions on a habitual basis, hiring of employees, employment of agents, these are indicators that a foreign corporation is a resident foreign corporation. But the 180-day period of course will never apply to a corporate taxpayer. It is not a criterion in determining whether or not a foreign corporation is a resident foreign corporation or a non-resident foreign corporation.

C. Partnerships

General Professional Partnerships (GPPs) are those partnerships which are established solely for the exercise of a common profession and no part of the income of which is derived from trade or business. These are treated as corporate taxpayers. So for partnership, there are two kinds: General co-partnership (GCP) and General Professional Partnership. Defined under the law, GPP is one established for the sole purpose of the exercise of a common profession of the partners and no part of the income of which is derived from trade or business. Very important yan. A GPP is exempt from income tax.

GCP. What is a General Co-Partnership? Sa civil law ang dami-daming klase. Sa tax dalawa lang. GCP is any partnership other than the GPP. Any partnership which is not a GCP is a GPP. A GCP is treated as an ordinary domestic corporation and therefore subject to tax. Its like an ordinary domestic corporation.

Things to know in income tax

1. Did you receive anything? If wala, forget it. 2. Is it income? 3. Who am I as a taxpayer? 4. What is the source of the income? 5. Is it taxable? 6. What kind of income tax do we impose? 7. What rate of tax do we apply?

So ang una niyong gagawin, Sino ba kayo bilang taxpayer? May tinanggap kayo? Pag sagot niyo ay OO, yun bang tinanggap niyo eh income? OO. Susunod niyong gagawin, Sino ba ako? Hanapin ninyo ang sarili ninyo. San ba ako diyan? At pag nakita na kung sino ka, ang susunod mong itatanong, San ba galing yang income? Is it within or without? Because among the kinds of taxpayers, when we determine the source of the income, only a resident citizen

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and a domestic corporation are taxable for income within and outside of the Philippines.

Income within and income without

What is the meaning of income within? Galing sa Pilipinas. What is the meaning of income without? Galing sa labas ng Pilipinas. Only a resident citizen and a domestic corporation are subject to income tax for income within and outside of the Philippines. The rest of the kinds of taxpayers are taxable only for income within, but not for income outside of the Philippines. From the table itself, you will be able to determine and see already double taxation in the broad sense because the income of a resident citizen from outside of the Philippines is taxable in the Philippines and that income may also be taxed in the country where it is derived from. Thats double taxation in the broad sense.

The income of whatever kind of alien from the Philippines is taxable here. And because they are citizens of another country, they are also subjected to tax in the country wherein they are citizens. Thats double taxation in the broad sense. Corporations, the same thing. This is a clear case of taxation in the broad sense, not prohibited under the Constitution, not encouraged but not illegal. The law recognizes the harsh effects of taxation in the broad sense and therefore the law also in income taxation provides for the remedies to reduce the harsh effects of double taxation such as: 1) tax credit; and 2) tax sparing rule. For branch profit remittances, these are the two means on how to reduce the harsh effects of double taxation in the broad sense kasi doon ita-tax din yan. Remember that our

tax system is based on international taxation. Pare-pareho lang yan. Same banana, same concept. May konting variations lang.

Tax credit

So yung income ng resident citizen sa labas ng Pilipinas, kung saan nanggaling yon, taxable din yun doon. So ang remedy natin para hindi masyadong mabigat sa taxpayer, meron tayong tinatawag na tax credit. I will teach you how to do it but not in computation form. Tignan lang natin yung konsepto but you can see immediately from the table alone.

When income is from within or without

Now, paano mo malalaman kung galing sa Pilipinas o sa labas ng Pilipinas ang isang income? Sinong nagsasabi na ang income ay within at without? Sec. 42 of the Tax Code. Yung Sec. 42 when you read it, napakahaba. Paragraph (a): income within; paragraph (b): income without; paragraph (c): income partly within, partly without. Huwag nang basahin yung (b) and (c), kasi yung b and c pag binasa mo at pinag-compare mo, pareho rin lang, baliktad lang nung (a). So pag binasa mo yung isa, alam mo din yung iba, pinagbaliktad lang. Pag wala sa a, nasa b. Pag wala sa b and c, nasa a. So isa lang ang alamin. Pag alam mo ang within, alam mo rin ang without. So lets concentrate only on one so that you will know both.

Interest income

Ang mga nakalista diyan ay una: (1) interest. Ano ang interest? One is interest on bank deposits and two, interest on loans. How will you know if the interest paid and received, syempre ang point-of-view dito ay sino ang nagbayad o binayaran? Ang binayaran. Kayo ang pinaguusapan. Hindi ako na nagbayad. So kaninong point-of-view dito sa interest, yung tumanggap ng bayad o yung nagbayad? Yung binayaran! Ano ang sabi ng batas? Ang importante diyan ay, of residents, corporate or otherwise. So resident corporations which may be either resident foreign corporations or domestic corporations, or when we talk about individuals, resident citizens and resident aliens. Derived from Philippine sources.

Interest income from bank deposit in the Philippines

Bangko. May deposito ka sa bangko ko, nandito sa Alabang. Binigyan kita ng P10 na interest on bank deposits. Income? Yes. Within or without? Within. Bakit? Ang bangko ay nasa Alabang. Nasa loob ng mapa ng Pilipinas in

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accordance sa archipelagic doctrine. Sino ka? Resident ka ba o hindi? Resident ka. So yan ay within.

Interest income paid by non-resident citizen to another non-resident citizen, both in US, but paid in Philippine Bank

Utang. Kapwa Pilipino, pareho tayong nasa US. Nag-utangan tayo. Pareho tayong non-resident citizens. Agreement? Bayaran mo ako ng utang mo ang interest i-deposito mo nga sa bangko sa Pilipinas. The debtor and creditor are both non-resident citizens. The interest was deposited in a bank in the Philippines. Income within or without? Without. Kasi parehas tayong non-resident citizen. Diba ang nakasulat sa batas, of residents, corporate or otherwise. Ano ka, non-resident citizen ka ba? Oo. Ako non-resident citizen din. Maga-apply ba yan sa atin? Hindi. Kaya yan income without.

Interest paid to resident citizen in Philippines

Pero kung ikaw ay nasa Pilipinas, binayaran kita ng interest, pinadala ko sa Pilipinas. Resident citizen ka. Yung interest ba ng utang ko sa iyo within or without? WITHIN.

Interest income in US bank paid to resident citizen

Lets take it a little further. Creditor, nasa Pilipinas ka. Resident citizen ka. Debtor, nasa labas ako ng Pilipinas, non-resident citizen. Binayaran kita ng interest sa utang ko sa iyo. Dineposito ko ito sa bangko sa USA. Within or without? WITHIN. Bakit? Resident eh. Nasusundan? You just have to be particular about what the law states. No gray area, no dirty white. Its there.Youre surprised now because all the while youre thinking na everything na dito binayaran ay within and everything na sa labas binayaran ay without. WRONG.

Services

Services rendered. Kung sa loob ng Pilipinas naggupit ng buhok, archipelagic doctrine, kahit saan nagbayad, walang pakialam. Income derived from services rendered is dependent on where the service was rendered, not where the payment is made. Even if ginupitan kita ngayon dito sa Pilipinas, nagbayaran tayo sa States, hindi magma-matter. Where are the services rendered? Whether the payment is within or outside of the Philippines is not material. Such that, if, let us say you are working for a Philippine company which has a branch outside of the Philippines, youre arrangement is, Sige padadala kita sa branch, you perform your work there but your salary will be deposited in the

bank in the Philippines so that your family can benefit. Within or without? WITHOUT. Kahit ang bayad eh nasa loob ng Pilipinas. Bakit? Because the services were rendered outside of the Philippines.

Sale of real or personal property

Lets summarize the income from sale of real property or personal property. Location is the rule. If youre talking about income realized from sale of property, the rule is where the property is located. Kahit pa tayo ay nagbayaran sa labas ng bansa, wala tayong pakialam. Nasaan ang real property? Nasa mapa ba ng Pilipinas? OHO. Kahit ang bayaran natin ay doon sa Paris, dineposito sa Hong Kong, Pilipinas ba ang real property? Oo. WITHIN.

Tangible personal properties

Ganun din . Where it is located. Location is the rule.

Intangible personal properties

What about intangible personal properties? Where is their location? If you sell shares of stocks, credits, debentures, notes, promissory notes, these are intangible personal properties. You dont look at the paper. NO. The certificate of stock, hindi yan ang tinitignan. Ano ang magde-determine ng location ng shares of stock, debentures, notes, promissory notes? Yung bang papel na lumalakad, bitbit? Hindi. What is the location of intangible personal properties? DOMICILE OF THE OWNER. Thats the rule. So hindi pinag-uusapan kung nasan ang papel. Pag ang binenta ay intangible personal property, the intangible personal property follows the domicile of the owner.

Shares of stocks in a foreign corporation, ang may-ari ay Pilipino. Eh yung shares of stocks na yun pag binenta kahit san ibenta, ang lokasyon nun ay Pilipinas. Bakit? Susunod yun sa ating buntot! Domicile. Lets be very, very careful.

So sale of property, LOCATION. Kahit anung klase, real property or personal property, tangible personal property, you can see, location. Intangible personal property, DOMICILE OF THE OWNER is the rule. The only time that we dont follow the domicile of the owner is in estate or donors tax under Sec. 104. Thats a specific law. So thats not a general rule.

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Dividends issued by domestic corporation

Lets go to dividends. Ano ba ang dividends? Meron kang shares of stock in a corporation. Meron profits and tubo ang corporation. Ang profits at tubo, idi-distribute sa stockholders in the form of dividends. So sino ang taxpayer na pinaguusapan? Yung may-ari ng shares of stocks na tumubo sa isang korporasyon. Binigay ng korporasyon si profits. Ang sabi ng Code, pag ang nag-issue na korporasyon ay domestic corporation, income within or without? WITHIN. Basta ang nag-issue ng shares of stock ay domestic corporation, WITHIN YAN LAHAT. Kahit sino ang tumanggap. Kahit ikaw ay resident citizen, non-resident citizen, resident alien, kahit anung klase ka doon. Pag ikaw ay tumanggap at nanggaling sa domestic corporation, yan ay within.

Dividends issued by foreign corporations

What about foreign corporations? Let us assume that the corporation issued P100,000 worth of dividends to stockholders. If domestic corporation, the entire P100,000 is within. Paano kung foreign corporation ang nag-issue? Within or without? Nasa codal. Hindi yan it depends. Ang sabi ng batas, within lahat SUBALIT kung tatlong taon bago binigay ang dibidendo, ang kinita ng foreign corporation sa Pilipinas ay mababa sa singkwenta porsyento (50%) ng suma total na kinita, hindi lahat ay within.

Conversely, if the income derived from the Philippines three (3) years prior to the declaration of dividends is more than fifty percent (50%), everything is within. Do not be confused. Our thinking is always, if its a foreign corporation which issued the dividends, we always think that its not in the Philippines. Hindi pinag-uusapan ang lokasyon. Ang pinaguusapan ay magkano ang kinita ng foreign corporation sa Pilipinas? Kapag ang kinita niya sa Pilipinas tatlong taon bago niya ibigay ang dibidendo ay mas mababa ng singkwenta porsyento (50%) ng suma total na kinita, hindi lahat ay within. Kaunti lamang. Ano yung kaunti? In proportion to the income derived from Philippine sources.

Dividends issued by foreign corporation with no Philippine branch

The foreign corporation is incorporated in a foreign country. The main office is in USA. It so happened that the foreign corporation does not have a branch in the Philippines, but has income from Philippines. Pwede rin may branch. In which case, the foreign corporation is a reside

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Documents

amerissa base vicechairperson

raphael salud vicechairperson

estate tax purposes

payment of tax

income tax purposes

donors tax purposes

government agencies

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